Interest rates have been reduced for the first time in more than four years, with the Bank of England lowering the rate from 5.25% to 5% on Thursday. This marks the first cut since March 2020, when the pandemic began and rates were initially lowered to support the economy.
Despite this reduction, the Bank of England has cautioned that borrowing costs are not expected to decline sharply in the near future. The decision to lower the rate reflects a careful balancing act, as policymakers aim to manage inflation while avoiding rapid or excessive rate cuts.
Andrew Bailey, the governor of the Bank of England, stated that while the cut is a step towards supporting economic stability, it is crucial to ensure that inflation remains controlled. The Bank is proceeding with caution to prevent any negative impacts that could arise from too swift a reduction in interest rates.
Interest rates have been rising in recent years as the Bank of England has worked to manage high inflation. These higher rates have increased costs for households, although savers have seen better returns on their deposits.
With the recent rate cut to 5%, homeowners with variable rate “tracker” mortgages will experience an immediate decrease in their monthly payments. However, those with fixed-rate mortgages may still face significantly higher rates when their current deals end in the coming years.
‘People are restricted with what they spend’
There are expectations that the recent drop in interest rates could boost consumer confidence, which has been low recently.
Rupali Wagh, co-owner of Tukka Tuk street food in The Cardiff Market, believes that a lower interest rate would benefit her business as it would increase customers’ disposable income.
Although business has improved recently due to the warmer weather, some customers are still spending less and ordering fewer items from the menu. “Many customers are very cautious with their spending,” she noted. “I’ve never had so many discussions at the table about mortgages and expenses.”
‘One and done?’
On the recent decision to lower interest rates, Mr Bailey commented, “Inflationary pressures have decreased enough to allow us to make this cut today.”
However, he advised against expecting a swift reduction in borrowing costs.
When asked by reporters if this rate cut would be the only one, Mr Bailey stated he did not predict future rate changes and that decisions would be made at each meeting.
The decision was closely contested within the Bank’s nine-member committee, with five members, including Mr Bailey, voting for a quarter-point reduction. The Bank’s chief economist, Huw Pill, was among the four who voted to maintain the current rate.
The recent interest rate cut will benefit some homeowners, but the Bank of England has warned that others may face mortgage challenges ahead.
About one-third of those with fixed-rate mortgages are still paying under 3%, thanks to deals secured when rates were lower. However, most of these loans will expire before the end of 2026, which means that effective interest rates will likely increase over time.
While the inflation rate met the Bank’s 2% target in May and stayed there in June, core inflation—excluding volatile items like food and fuel—remains high. The Bank anticipates that inflation could rise in the latter half of the year as energy costs increase with the colder months.
Although wage growth, which can drive inflation, has slowed, the Bank continues to monitor it closely. The recent public sector pay rise announced by Chancellor Rachel Reeves is not expected to significantly impact inflation.
Ms Reeves welcomed the rate cut but noted that many families are still dealing with high mortgage rates, a situation she attributed to former Prime Minister Liz Truss’s mini-budget. She stated that the government is working to strengthen the economy and improve conditions across the country.
Growth forecast upgraded
Ms Reeves announced wage increases of 5% to 6% for public sector employees, including NHS staff and teachers, on Monday. She also accused the Conservative government of leaving a £22 billion gap in public finances and trying to conceal it.
The Conservatives have countered, suggesting that Labour is preparing for tax hikes in the upcoming Budget on 30 October.
The Bank of England confirmed it had received briefings from the Treasury on the financial figures before Ms Reeves’ Commons statement. However, it noted that it was too late to factor in the impact of her announcement—along with her cancellation of several public spending projects—into its Monetary Policy Report.
The report, also known as the Bank’s inflation report, outlines growth forecasts for the UK economy and is released quarterly. The Bank has improved its growth forecast for the UK’s GDP for April to June, now predicting an expansion of 0.7%, up from the earlier forecast of 0.2%. However, growth is expected to decelerate in the second half of the year as businesses report weaker performance.
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